The Ice Cream Split: Empirically Distinguishing Price and Product Space Collusion

Abstract

In a market for differentiated products, firms have the ability to collude on the choice of products offered in addition to or in lieu of colluding on the prices charged for those products. However, the empirical literature has only considered price collusion. This paper proposes a methodology to measure product space and price collusion. To do so, I model firms as competing in an infinitely repeated extensive form game. I show that a subset of equilibria to the dynamic game can be represented as subgame perfect Nash equilibria to a static game. The static equilibria index the degree to which firms collude through reduced-form parameters. I show that these parameters can be estimated using standard techniques when researchers have access to market level data. I then use this methodology to study competition in the market for super-premium ice cream during 2013. I find evidence that Ben & Jerry’s and Haagen-Dazs not only colluded on the prices they charged, but substantially colluded in the choice of flavors that were offered. Then, I construct counterfactuals to measure the impact of collusion on the set of products offered, the prices charged, and welfare. I find that conventional policy analysis that considers only price collusion understates the welfare effects.